How to Pre-Qualify Potential Loan Modification Clients
Many mortgage brokers, real estate brokers, attorneys, and other entrepreneurs are getting into the lucrative loan modification industry these days. And with good reason, there's a lot of money in helping people save their homes right now. One of the first questions almost every new loan mod consultant has is how to decide who will likely qualify for a mod, and who probably won't. Neither you nor your clients want to waste time, effort, and money trying to modify a loan that's clearly a lost cause.
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For starters, you've got to find clients who can and are willing to pay you when you're successful with the mod. You need to be honest with them from the start about how much you charge. If they don't think they can pay you what you require, even with a payment plan, then you should probably not accept them as a client. Harsh as that sounds, you need to earn a fair commission for your efforts. You need to earn an honest living, or else you'll be modifying your own delinquent mortgage next.
So that's the first cut. But how do you know who has a legitimate chance to be approved by the bank's modification underwriters? A good candidate is employed, is a little delinquent on their mortgage payments, is an owner occupant (as opposed to an investor), and a small boost to their budget would make all the difference. A couple hundred bucks lower payment should help the borrower get back on his or her feet for good.
If the borrower recently had a salary cut, or one spouse was laid off but the other is still employed, or if he or she had a temporary illness or injury that cost a lot of money or required time off from work, then the mod might be approved. Personal emergencies (such as illness or death of a loved one), divorce, and pregnancy will often be considered as legitimate reasons for a modification. ARMs that just adjusted, or will soon, are common loan mod candidates. Your clients will typically need to be behind on their mortgage already, though this has begun to change as lenders get more and more proactive these days.
Who has a smaller chance of getting approved for a modification? First, stay away from investors as clients. Rental properties, vacant or occupied, are much more trickier to modify, nearly impossibly in most cases. Lenders are trying to put their efforts toward only helping homeowners instead of investors, however this has already begun to change as lenders reevaluate their modification guidelines in 2009. If your client can't verify income, such as with self-employed borrowers, then the mod will be more difficult.
If your client is doesn't have any income at all (or, if married, both borrowers are unemployed), they need to either get a job before trying the mod or begin working with a short sale expert to sell their house immediately, unless the unemployment and lack of income is truly temporary (and about to end) or due to temporary medical problems. This can be a great opportunity for you to refer the client to a real estate broker for a referral fee, if allowed in your state. Clients with debt-to-income ratios (DTI), say, over 50% to 60% or higher, then lenders see that file as a lost cause and will often turn it down immediately. If your client files bankruptcy to get rid of the excess debt, then you may have a better chance at an approval due to a lower DTI. Be careful about advising clients to file bankruptcy, however. Refer them to a bankruptcy attorney to decide if bankruptcy is the right path.
In a nutshell, lenders are willing, even eager in some cases, to help the "Goldilocks" borrowers who are just a little short on their budget every month. They don't make too much, relative to their payments, but they also don't make so little as to be a lost cause. These borrowers are "just right," according to the bank's guidelines. The modification should drop their payments just enough to make the difference between falling further behind and getting back on their feet.
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